Question: Real Time Systems is considering the development of 1 of 2 mutually exclusive new computer models. Each will require a net investment of dollar 5,000. The cash flow figures for each project are shown below:
|
Period
|
Project A
|
Project B
|
|
1
|
$2,000
|
$3,000
|
|
2
|
2,500
|
2,600
|
|
3
|
2,250
|
2,900
|
Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds two percentage points to arrive at a risk adjusted cost of capital when estimating a high risk project. The cost of capital used for average risk projects is 10.5%. Calculate the NPVs for Models A & B?